Duration is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates. In general, the higher the duration, the more a bond's price will drop as interest rates rise. This also indicates a higher level of interest rate risk.
Before budget 2024, the specified mutual funds (having more than 65% debt) were taxed at investor's slab rates if the holding period exceeded 36 months. However, after the Budget 2024 update, this holding period has been reduced to 24 months.
A debt fund in life insurance is a type of investment fund offered within a Unit-Linked Insurance Plan (ULIP). The fund invests primarily in fixed-income securities, such as bonds and debentures, which are issued by companies, governments, and other organizations. They usually have a long-term tenure of investment.
Liquidity: Debt funds feature high liquidity, with speedy redemption, usually within one or two working days. Unlike fixed deposits, there's no lock-in period, but some funds may impose minor exit costs for early withdrawal.
Yes, most debt funds allow withdrawals anytime without incurring an exit penalty.
A holding period is the amount of time the investment is held by an investor, or the period between the purchase and sale of a security. Holding period is calculated starting on the day after the security's acquisition and continuing until the day of its disposal or sale, the holding period determines tax implications.
Some of the major risks in these instruments/funds are: 1) Interest risk- This is also known as price risk. Whenever there is a change is the interest rates the price of a debt instrument also changes.
Long duration debt funds typically put money into long-term government and corporate bonds, as well as other financial instruments that are expected to yield returns over many years. The primary advantage of investing in long duration debt funds is the opportunity for higher returns in return for the increased risk.
The average life is the length of time the principal of a debt issue is expected to be outstanding. Average life does not take into account interest payments, but only principal payments made on the loan or security.
There are micro/macro-economic factors affecting the debt funds, the interest rate fluctuations, the possibilities of the abovesaid bodies not being able to repay the loans or the securities losing liquidity in the market for buying/selling.
A term fund has a specified termination date at which time the fund's portfolio is liquidated. Investors who own shares when the fund terminates receive a cash payment equal to the NAV per share at that time. This NAV may be higher or lower than what the investor originally paid.
Debt-Oriented Mutual Funds: These funds invest in fixed-income securities like bonds, government securities and corporate debentures. You must hold debt-oriented funds for over 24 months to qualify for long-term capital gains.
Even if you're able to regularly make your monthly minimum payments, interest rates can keep your debt from decreasing significantly — allowing the cycle to perpetuate. With so much of your monthly income going to pay down your debt, you'll continue struggling to save and unforeseen costs will continue to come up.
A bond's maturity date indicates the specific future date on which an investor gets his principal back i.e. the borrowed amount is repaid in full. Average Maturity is the weighted average of all the current maturities of the debt securities held in the fund.
Debt Mutual Fund Taxation. The tax rate on debt funds is determined by the investor's income tax slab. The short-term capital gains tax rate is 20% and for the long-term capital gains, the tax rate is now a flat 12.5%, but without any indexation benefits.
Overnight Funds
These overnight instruments are backed by collateral which comprises of Government Securities, and so these funds also have no credit risk. These are the safest debt funds but their yield is usually also the lowest. Overnight funds are suitable for parking your funds for a few days.
Debt funds are very liquid and can be redeemed easily, usually within one or two working days of placing the redemption request. Unlike bank fixed deposits or recurring deposits, there is no lock-in period.
Which is better debt fund or equity fund? The choice between debt and equity funds depends on individual investment goals, risk tolerance, and time horizon. Equity funds offer higher potential returns but come with higher risk, while debt funds are safer but offer lower returns.
Investments such as stocks do not have a fixed rate of return, but the Rule of 72 still can give you an idea of the kind of return you would need to double your money in a certain amount of time. For example, to double your money in six years, you would need a rate of return of 12%.
Remember that investments should be held for at least five years, but preferably longer. They can fall as well as rise in value, so there's the risk you could get back less than you put in.
How are they managed? While they can be actively or passively managed by fund managers, most ETFs are passive investments pegged to the performance of a particular index. Mutual funds come in both active and indexed varieties, but most are actively managed.